About Papa John’s
In order to help pay for one of MacroHint’s partner’s graduate school tuition, their dad is a part-time professional administrator and a Dasher (delivery driver for DoorDash) on the side.
One of his favorite prime pick-up spots is none other than Shaq’s favorite pizza chain, Papa John’s.
I mean, he must be a big fan of the brand if he has a pizza by the name of the “Shaq-a-roni” named after him.
He’s also a big fan in the sense that he’s over 7 feet tall.
Anyways, back to the dad who is a Dasher.
He found himself walking in (with his DoorDash distributed pizza bag, of course) and being promptly greeted by an enthusiastic Papa John’s employee who felt the strong urge to remind him of the Papa Rewards program.
It’s not every day that a pizza savant and Dasher get to engage in such engaging discourse.
All jokes aside, this guy deserves a raise and perhaps some Papa John’s stock, of course, if it’s worth investing in to begin with.
But I guess we can help you with that.
While we have done previous stock analysis articles just for you, our audience, it’s only right that we perform and dedicate an analysis to a valiant Papa John’s employee who represents the brand quite well.
Before delving into the numbers, here is some basic information regarding the company for those who aren’t familiar with Papa John’s.
First and foremost, the company is the world’s third largest pizza delivery company.
The company has corporate-owned restaurants as well as franchised establishments across the United States and all over the world (operates in 44 countries and all 50 states), which is something to note for a company that is typically just thought of as an American-based company. In terms of how many locations the company has, it maintains nearly 5,200 total stores, 4,456 of which are franchises, which isn’t an uncommon ratio between company-owned and franchised, as we’ve seen in previously written stock analysis articles involving companies such as Wingstop and McDonald’s.
Now that we’ve laid some foundation, let’s see how good this company is at truly raking in the dough.
Papa John’s’ stock financials
Papa John’s stock is currently trading at around $87 per share, with a market capitalization of $3.1 billion, a price-to-earnings (P/E) ratio of 46.35 and offers its shareholders an annual dividend of $1.68 (presently yielding 2.15%).
Right off the bat it can be gathered that Papa John’s stock is trading at an expensive share price, considerably higher than the amount it is actually worth paying given its current financial footing, according to its P/E ratio.
In simpler and less jargon-filled terms, the company’s stock is overvalued and not worth what it’s trading at right now given its present growth and growth trajectory.
Of course, this could change but from our view if the company’s current growth holds constant, it would mean the share price taking a rather steep dive to the downside, landing somewhere in the $50-$60 range to be considered fairly valued.
Pictured above is the man, the myth, the legend himself, Shaq
However, this is just one of a few other important indicators and metrics worth considering when looking into a public company’s financials.
Let’s move on.
According to the company’s balance sheet, Papa John’s’ executive team tends to around $886 million in total assets as well as just north of $1 billion in total liabilities.
We’ve seen a familiar “total liabilities outweighing total assets” trend in recently written stock analysis articles.
While Papa John’s total assets aren’t far off from its total liabilities, we are generally of the school of thought that investors should tread cautiously when large, established companies have more liabilities than assets on their books, regardless of reason.
However, it can be seen that the company’s total liabilities have increased nearly 35% between the time of this publication and 2019, likely caused by COVID-19 and supply chain-related impacts that obviously, didn’t bode well for the business. Even if this is the primary cause for an increase in total liabilities, if the company does bring its total liabilities back down to 2019 levels, we still view that as a large amount of total liabilities to reckon with.
Food businesses are notoriously known for being messy, waste-filled and costly, however the numbers don’t lie and for us to get excited about this stock, we would be looking for the company to pay down substantial portions of its outstanding debt(s) during and after the current recession, which isn’t as straightforward and simple as it may sound.
Onto the company’s income statement, the company’s total revenue over the last five years has by and large been consistent, sitting at nearly $1.8 billion in 2017 and rising to just above $2 billion in 2021. Given recent revenue history along with the current state of the macroeconomy, we don’t think it would be responsible or realistic for investors to expect much additional revenue for years to come, as it would be far more levelheaded and logical to assume revenue in the foreseeable future to remain between $1.8 billion and $2 billion.
In relation to Papa John’s cash flow statement, the company has thankfully been able to carve out positive (and consistent) total cash from operations over the past five years, on average staying in the $150 million area code. Additionally, the company’s net income has been positive during the same time period, however it did drop to nearly negative levels, at around $4 million in 2018 and around $5.7 million in 2019.
While this can likely be attributed to investments in new products, equipment and/or its workforce, we viewed this as dangerously low levels at first, however the company was still able to churn out positive total cash from operations during the same years, so our concerns regarding the consecutive years of comparatively low net income are mostly allayed.
Papa John’s’ stock fundamentals
On the profitability front, Papa John’s trails behind its peers, on average.
For instance, the company’s trailing twelve month (TTM) net profit margin is presently pegged at 3.38% compared to the industry’s average of 8.39%. Now, the pizza landscape, like many industries and companies we’ve covered in the past, is competitive, to say the least.
Papa John’s’ toughest competition includes the likes of Yum! Brands’ Pizza Hut, Domino’s Pizza, Detroit-headquartered Little Caesars, Marco’s Pizza, Cici’s Pizza and of course, local neighborhood chains, of which local consumers tend to be invariably loyal to.
Without a shadow of a doubt, the pizza industry is like cafeteria pizza itself; tough.
We mention this because it is probably one of the major reasons the company’s TTM net profit margin is a bit lower than the competition, again, on average.
It’s not an excuse, but it’s a fact of life that Papa John’s and its shareholders have to come to grips with.
On a more positive note, the company’s TTM returns on assets and investment are both higher (not by much, between 2% and 4%, respectively) than the industry’s average, which is hopefully something Papa John’s can maintain, especially during times of economic uncertainty and less consumer spending.
An interesting Papa-sition for Papa John’s
Frankly, we don’t want Papa John’s to mire itself in any more debt right now, especially when it’s likely it will have to acquire more during the worst of the current recession just to keep the lights on, which is likely set to happen with many major businesses and corporations, small and large.
However, if or when Papa John’s tidies up its balance sheet and becomes total asset-heavy, we think one way in which the company could increase its long-term profitability is to buy out some of the competition.
In previous articles where we’ve specifically considered potential strategic targets for companies such as The Hershey Company, Cintas, Clorox and others, these companies were far better capitalized than Papa John’s at the moment and could thus afford to shell out billions and buy out some of their formidable competitors.
However, if or when Papa John’s trims its total liabilities down, we think the company ought to consider targeting pizza companies such as Papa Murphy’s and Sbarro or likely one of the largest companies it can potentially afford to acquire but likely well worth it, privately held Little Caesars.
With well over 4,000 locations, considerable market share in the pizza space and similar yet differentiated product offerings, we think Papa John’s potentially eating up or taking the whole slice (come on, we had to) of Little Caesars could help the company become a more formidable competitor in the long run in the eyes of competitors such as Domino’s and Pizza Hut.
Don’t get us wrong, from a market share perspective Papa John’s is doing pretty well (third place isn’t the worst by any means), however, as long-term investors we want the company to get closer to the industry’s average TTM net profit margin while increasing its share of the global pizza pie, and a strategic acquisition could be conducive to achieving both of these goals.
Some report that Little Caesars as a whole is worth $1.5 billion, which we think could be an affordable price point for Papa John’s if it hewed down some of its debt and was able to secure sufficient financing in order to close the deal.
We hope this is on Papa John’s’ executive teams’ radar.
We’d also like to briefly note that as seen in previous articles, trying to buy out private companies that are family-owned can add an entirely new level of unwanted complexity, and of course, Little Caesars just happens to be owned by one of Detroit’s most affluent families, the Ilitch family.
Some families have retirement accounts and some own one of the world’s largest pizza establishments in the world along with NHL hockey franchise, the Detroit Red Wings.
Tomato, tomato.
All in all, we think it would be worth Papa John’s’ executive team to consider targeting some of the other prominent pizza players, of course, after straightening out its total liabilities and pushing through the recession.
Should you buy Papa John’s stock?
There you go, Papa Rewards guy.
You are a legend in your own right and Papa John’s should be grateful to have a knowledgeable, enthusiastic and superstar pizza expert such as yourself.
Unfortunately, it is our opinion that the company’s stock isn’t worth buying right now given the shares being significantly overvalued and the heightened level of total liabilities relative to total assets currently on its books.
Given all of this information, we deem it appropriate to give the company’s stock a “sell” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.